Banking reform praised

Taiwan's government is winning praise from bankers and analysts for making it easier for lenders to sell bad loans and to merge. It's also under fire for pushing the same banks to extend more loans to ailing companies.

Welcome to Taiwan's "on-again-off-again" effort to fix its banking system -- without cutting credit to some of its biggest companies and thus increasing unemployment ahead of the nation's December parliamentary elections.

Taiwan needs to reduce bad loans at banks, running at as much as 15 percent of total loans according to some analysts. Yet it's wary of stalling an economy already growing at its slowest pace in nearly three decades.

"The government has political pressure with the year-end elections coming up and reform is a longer-term goal," said Winnie Tiao, who helps manage NT$16 billion (US$465 million) in investments at Grand Pacific Securities Investment Trust Ltd (中信投信) in Taipei. "Sometimes they lean toward reform and sometimes they lean toward election concerns." Last week, the government was in reform mode.

The DPP executive and the Nationalist Party-controlled legislature reached a rare agreement and passed half a dozen financial industry laws in a special two-day session.

The laws make it easier for banks to merge by allowing them to form holding companies. Supervision of the financial industry will be taken over by a single authority, and lawmakers earmarked US$4 billion to buy bad loans from the island's smallest lenders.

Still, in the 13 months since the DPP came to power, its efforts to pass legislation have been stonewalled by the KMT, which holds a slim majority in the 220-member parliament.

Its hopes of winning a majority of seats may be stymied by the island's worst economic conditions in more than two decades.

The economy grew at its slowest pace in more than 26 years in the first-quarter, 1.1 percent. It's jobless rate rose to 4.4 percent in May, the highest since the government began compiling statistics in 1978.

"Taiwan is still flat on its back economically," said Han Ong, head of Asia-Pacific strategy at Salomon Smith Barney Hong Kong Ltd.

At the same time, the Central Bank of China and Ministry of Finance have been pressuring banks to keep lending to viable companies since last year -- with some success, as the government controls the assets of nine of the island's top 10 banks.

It's also trying to help companies that have already stopped repaying debt, such as Hualon Corp (華隆), which in May faced calls to repay NT$29.3 billion of loans. The textile maker asked for -- and received -- government help, forcing 22 banks to cut interest charges and give it more time to repay debt.

"The ministry has agreed with our request for a payment extension though talks are still ongoing," said Yao Chia-chih, a Hualon spokeswoman. "We expect a decision in the next month." That type of interference shouldn't happen, say bankers.

"I don't think government intervention is the right approach," said Jason Wang, chief financial officer at Chinatrust Commercial Bank (中國信託商銀). Banks that ignore directives can be called in to explain themselves to senior officials, he said.

For its part, the government says it's only asking banks not to create a credit crunch by cutting off loans to good companies just because the economy is slowing.